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Limiting Employer Tax Exclusion May Help Pay for Health Reform

Janice Simmons, for HealthLeaders Media, June 8, 2009

Congress may find it difficult to finance universal coverage unless it limits to some extent the exclusion of employers' health insurance payments from employees' income and payroll taxes, according to a new study from the Center on Budget and Policy Priorities in Washington.

"There are a huge number of ways to raise additional revenues," said Paul Van de Water, a senior fellow at the center, who authored the report. "At least in theory, one could pay for health reform without limiting the employer exclusion. But, when we go through the individual options one by one and think about all of the objections that are raised to them, we think as a practical matter that it may be very hard to pay for health reform without doing something to limit the employer exclusion."

The issue, in various forms, has been discussed by the Senate Finance Committee as a way to pay for coverage under healthcare reform. So until other alternatives are identified and settled, "we shouldn't rule this or anything else off the table," said Van de Water, who previously served as vice president for health policy at the National Academy of Social Insurance and as deputy assistant director for budget analysis with the Congressional Budget Office.

The current exclusion is poorly designed, which gives a greatest benefit to those with higher incomes, according to the report. The higher exclusion can provide an incentive for employers and individuals to select more generous or costly coverage, which in turn could lead to an increase in healthcare service demand that pushes up prices.

In a way, limiting tax exclusions could push in the direction of greater efficiency in the healthcare system, Van de Water noted. Those with higher benefits might end up seeking more economical plans that use resources more effectively.

"It's not a perfect tool, but clearly we're going to have to do a lot of different things to drive the system to be more efficient. This is one that would run in the right direction," he said.

It's unlikely that Congress will choose to move toward making  employer sponsored insurance totally taxable. "That clearly doesn't seem to be in the cards," Van de Water said. Instead,  other options could be considered, such as basing limits on household incomes, basing limits based on the value of insurance, or basing limits on both incomes and insurance value. 

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